Turkey Raises Rates to End Lira Fall as Basci Defies Erdogan

by **Cals** Wed 29 Jan 2014, 08:15

Turkey Raises Rates to End Lira Fall as Basci Defies Erdogan

By Onur Ant Jan 29, 2014 7:21 AM GMT+0800
Turkey’s central bank raised all its main interest rates at an emergency meeting, resisting political pressure and reversing years of policy, after the lira slid to a record low.
The bank in Ankara raised the benchmark one-week repo rate to 10 percent from 4.5 percent, according to a statement posted on its website at midnight. It also raised the overnight lending rate to 12 percent from 7.75 percent, and the overnight borrowing rate to 8 percent from 3.5 percent. The lira extended gains after the announcement, adding 3 percent to 2.18 per dollar at 1 a.m. in Istanbul.
The bank also said that investors should now treat the repo rate as the main indicator, instead of the lending rate. That makes today’s move an effective tightening of between 200 basis points and 400 basis points, according to Neil Shearing at Capital Economics in London.
The bank’s governor, Erdem Basci, is fighting to arrest a currency run that has gained speed as domestic political tensions overlap with global market shifts. He’s also run into pressure from Prime Minister Recep Tayyip Erdogan and his government to keep rates low to bolster growth.
‘Faced Down’
The Lira Reacts to Turkey's Continental Divide
“The central bank is taking a pretty big step towards regaining some of its lost credibility,” Shearing said in a phone interview. “It’s put the emphasis squarely on preserving market stability and tackling inflation, and at the same time it’s faced down the government.”
[You must be registered and logged in to see this image.]Photographer: Kerim Okten/Bloomberg
Buildings stand illuminated on the city skyline seen from the Sapphire viewing platform...Read More

Turkey’s financial markets have been falling since a corruption scandal broke last month, ensnaring several cabinet members. That coincided with a flow of money out of emerging economies, weakening currencies from Brazil to South Africa, as the U.S. reduces monetary stimulus.
A rate increase of at least 250 basis points was needed to stop the lira’s slide, Royal Bank of Scotland Plc said in a report yesterday before the emergency meeting. “Turkey has exhausted all its other options,” it said.
Basci’s efforts to cushion the external and internal blows have been constrained by political opposition to raising borrowing costs. While most investors advocated higher rates to bolster the lira, Prime Minister Recep Tayyip Erdogan has repeatedly railed against an “interest-rate lobby,” blaming it for a series of blows to his government, including last year’s wave of protests and the graft probe implicating his ministers.
Simpler Framework
It was a lira crisis that laid the foundations for Erdogan’s 11-year rule. The collapse of an International Monetary Fund program in 2001 led to a devaluation of more than 50 percent. In elections a year later, the parties that presided over the crisis were swept away, clearing a route for Erdogan’s Islamist-rooted movement to win a majority.
Erdogan says growth of 5 percent a year under his government has left Turkey’s economy less vulnerable to such shocks. The premier reiterated yesterday that he’s always been opposed to rate increases. Speaking in Ankara before leaving for Iran, he said he hoped the bank would make the right decision and usher in a “new era” for the Turkish currency.
Basci has accommodated the political pressures by developing a framework that allows him to tighten policy without raising headline rates, and vary monetary conditions day-to-day within an interest-rate corridor.
The bank said today it would seek “to simplify the operational framework.”
Stocks Slump
At the last regular policy meeting on Jan. 21, Basci had left the three main interest rates unchanged, even after the lira had declined 8 percent in a month. He opted instead to introduce a fourth rate of 9 percent, to be used only days when the bank decides extra tightening is needed.
That mechanism will disappear after today’s decisions. The bank also increased the late liquidity window rate to 15 percent from 10.25 percent.
As the currency’s slide picked up pace last week, Basci intervened directly in markets for the first time in more than two years, selling about $3 billion. That only accelerated the slump, leading the bank to reassemble last night.
The announcement on Jan. 27 of the emergency meeting helped the lira pare losses in the past two days, though stocks and bonds continued to drop.
Allaying Concerns
The benchmark equity index reached an 18-month low yesterday, and has dropped 24 percent in dollar terms since news of the corruption inquiry broke on Dec. 17, the most among global benchmarks. Yields on two-year lira bonds closed above 11 percent yesterday for the first time since January 2012.
Turkey isn’t the only emerging nation to raise borrowing costs this month in response to plunging markets. India unexpectedly increased rates yesterday, and Brazil has pushed its benchmark higher for six straight meetings.
“While the sharp increase in interest rates will unfortunately slow the Turkish economy in the short-term, it is a very welcome first step in returning Turkey to economic orthodoxy and restoring confidence,” said Sam Vecht, a portfolio manager at Blackrock Emerging Europe Investment Trust, in e-mailed comments. “The actions being taken by central banks in diverse countries such as Brazil, India and now Turkey should help allay investor concerns.”
To contact the reporter on this story: Onur Ant in Ankara at [You must be registered and logged in to see this link.]
To contact the editor responsible for this story: Andrew J. Barden at [You must be registered and logged in to see this link.]